Rate cut fears sharpen

Thursday April 3rd 2008
Pound Consolidates Gains But Rate Cuts Still Expected

The Pound remained steady in trading yesterday and even managed to squeeze back a bit more ground on most major currencies following what can only be described as a dismal slump in recent months. The only currency that Sterling remains historically strong against is the Greenback and this is mainly due to the fact that many of the problems that are causing the Pound to slump are being felt to an even greater extent across the Pond.

The Chairman of the US Federal Reserve (the body that sets interest rates in the United States) Ben Bernanke admitted yesterday that America may face a recession in the first half of the year. He said “It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly”. He went on to say that the recent slashing of interest rates will help turn things around for the US economy in the second half of the year and “growth is expected to proceed at or a little above its sustainable pace in 2009”. The cuts in interest rates State side were designed to stimulate growth and free up liquidity in financial markets due to the current global credit squeeze. Along with other emergency measures, such as bailing out investment bank Bear Stearns, to alleviate current stresses in the market, Bernanke feels sufficient action has been taken to remain confident in the long term prospects of America. However in the short term these steps have also massively weakened the Dollar as investors move their assets into other currencies to seek a better return on their funds. This means that although the Pound is vulnerable at the moment, there are still some great buying opportunities if you need Dollars for your overseas purchase.

With the housing market in the UK slowing down and our own financial sector also in turmoil, the Pound is facing similar problems to the Dollar and as such has weakened massively against all currencies bar the US currency in recent months. With two recent interest rate cuts to try and ease the problems it looks as though more cuts are imminent although the Bank of England will also have to weigh up the risks of higher inflation if it does cut. Lower rates would normally lead to higher inflation, which is already running above the Bank’s target rate of 2%. However the members of the Monetary Policy Committee may have their hands forced due to the scale of the problem UK banks are facing such as the Northern Rock scenario. Paul Tucker, one of the policymakers, said “given the unusual combination of significant downside and upside risks to the medium-term inflation outlook, the broad policy is to offset some but not all of the adverse shock to demand from tighter credit conditions. And to do so by changing Bank Rate gradually and with transparency.” Again this is another clear statement that the UK interest rate is likely to come down slowly and steadily in the near future, so whilst we are not likely to see the sharp drop in value the Dollar experienced when rates were slashed, we are likely to see Sterling remain weak in the foreseeable future. As such if you have an upcoming currency requirement it may be worth moving sooner rather than later to prevent costs running away from you if the exchange rate does drop. A cut may occur as soon as next Thursday so if you would like to discuss your requirements in advance of this why not contact your account manager today and avoid any possible fall out if interest rate do get cut. On the same day keep an eye out for the equivalent announcement of the ECB (European Central Bank) of their monetary policy, as speculation about the outcome of both decisions can lead to a very volatile market. Also of note today are the release of PMI (Purchasing Managers Index) for Germany, the Eurozone as a whole, and the UK as well as February retail sales figures for Europe and the ISM (Institute of Supply Management) Non-Manufacturing data, all of which could have the power to move the exchange rates depending on their outcome so be ready to move quickly.